Lifetime Isa early exit charge under threat

The Government may be forced to scrap the controversial 5 per cent exit penalty on its new Lifetime Isa.

Money Marketing understands an industry working group met last week and discussed concerns that the exit charges could lead to the product being as classed as “complicated” under Mifid II rules.

As a result providers would have to undertake more extensive suitability processes. To date, firms have been reluctant to commit to offering the product until more details are released.

Tisa policy director Adrian Boulding says: “To sell someone a complicated product you need to go through more hoops to check their understanding and that they are capable of tolerating loss.

“It’s possible because of the exit penalty Mifid might class the Lifetime Isa as a complicated product. That extra hoop might put people off and people might fail the test. The penalty will not make it through to launch.”

Pinsent Masons partner Simon Laight thinks it is unlikely the products will be classed as complex unless the underlying assets are illiquid. But he says: “There’s a reasonable chance the penalty will be removed because it becomes untenable to be calling for exit charges in the pensions arena to be removed and then in the next breath launching another product you can’t access for an extra five years with a penalty – it just looks embarrassing.”

From April 2017 under-40s will be able to save up to £4,000 a year into the product which will receive a 25 per cent Government uplift until 50.

Funds can be withdrawn from 60 or earlier if used for a first time property purchase. In other cases the bonus – and any returns earned – will be forfeit and a 5 per cent exit penalty will apply.

A Treasury spokesman says: “Savers will be able to make withdrawals at any time for other purposes, but with the bonus element of the fund plus any growth on it returned to the Government, and a small 5 per cent charge applied. We are working with stakeholders to ensure the new Lifetime Isa is easy and simple to use.”

Are we really stuck with designing products that are understood by the most moronic amongst us.

How many people do you know who can’t grasp the notion of 5% penalty if you take your money out early|?

What abut index-linked certificates where the rate varies with something called CPI and yes you can have your money out but you will lose the bonus.

Yes you can access the money in this fixed term account but you will lose 3 months interest.

Of course you can cash the bond in early but the excess over the cumulative withdrawals will be subject to a penalty of x in year 1 or y in year 2 etc

Maybe some Government in 20 years will be looking at hitting the providers of lifetime ISAs with the compulsory removal of the 5% penalty and the notional bonus they took into account when offering the cash return on the product 20 years ago.

Let’s face it, the Government, the FCA, the FOS, HMRC, the EU et al having the faintest idea about anything do they?